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[bobf <bobford79 AT yahoo.com>]

Wow, this just has me shaking my head.  The imbecilic Congress gives billions 
to failed banks to rescue failed bankers and now the fed is giving billions 
to failed hedge funds to rescue failed hedge fund managers.

Unbelieveable

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FT.com

Hedge funds gain access to $200bn Fed aid 

By Krishna Guha in Washington 
December 20, 2008 6:01:44 AM
  
 
Hedge funds will be allowed to borrow from the Federal Reserve for the first 
time under a landmark $200bn programme intended to support consumer credit.

The Fed said on Friday it would offer low-cost three-year funding to any US 
company investing in securitised consumer loans under the Term Asset-backed 
Securities Loan Facility (TALF). This includes hedge funds, which have never 
been able to borrow from the US central bank before, although the Fed may not 
permit hedge funds to use offshore vehicles to conduct the transactions.

The asset-backed securities to be funded under the programme are pools of 
credit card receivables, automobile loans and student loans.

The idea is to increase the supply of these loans and reduce borrowing rates 
by ensuring that the companies that make the loans can sell them on to 
investors who have guaranteed access to low-cost funding from the Fed.

The TALF is a key plank of the unorthodox strategy set out by the Fed last 
week as it cut interest rates virtually to zero. Washington insiders expect 
the programme will be dramatically expanded next year with further capital 
support from Treasury once the Obama administration takes office.

A senior official in the outgoing Bush administration told the Financial 
Times it could also be broadened to include new commercial and residential 
mortgage-backed securities.

The Fed thinks risk premiums or "spreads" for consumer loans are much higher 
than would be justified by likely default rates, even assuming a nasty 
recession.

It attributes this to a lack of buying interest in the secondary market where 
the loans are sold on to investors. By making loans to these investors on 
attractive terms it aims to increase market liquidity.

Making the scheme open to all US companies is a radical departure for the 
Fed, which normally supports financial market liquidity indirectly by 
ensuring banks have adequate liquidity to make loans to other investors.

However, the liquidity the Fed is providing to banks is not flowing through 
to financial markets, because banks are balance-sheet constrained and 
risk-averse. So it is channelling funds directly to investors.

The scheme is not designed specifically for hedge funds and a wide range of 
financial institutions are likely to participate.

Nonetheless, Fed officials hope that hedge funds will be among those 
investors that take advantage of the low-cost finance to drive down spreads.

The loans will be secured only against the securities and not the borrower. 
However, the Fed will lend slightly less than the value of the securities 
pledged as collateral. The Treasury has committed $20bn to cover potential 
losses.

Since the credit crisis erupted, hedge funds have complained that they cannot 
get the leverage they need to arbitrage away excessive spreads and meet high 
hurdle rates of return.

"Demand is there for leverage but not supply," said Sylvan Chackman, head of 
global equity financing at Merrill Lynch.

In effect, the Fed will now take on the role of prime broker – the lead bank 
that lends to a hedge fund – for specific assets.

Additional reporting by Henny Sender in New York

http://d2cft.volantis.net/d2c/0.0?feed-article-id=989db158-ce30-11dd-8b30-000077b07658